USD/CAD Loonie Weaker Ahead of FOMC After Oil Tumble

The USD has advanced 0.60 percent versus the CAD in the last 24 hours. The currency pair is trading at 1.3359. The drop in oil prices has driven the USD/CAD above the 1.33 price level and briefly traded at 1.34. CAD traders will be looking for the FOMC rate statement for signs of a growing monetary policy divergence between the two nations. The Bank of Canada (BoC) is expected to hold rates unchanged until the second half of the year. The U.S. Federal Reserve could give signs of a rate hike in the June FOMC meeting, which would boost the USD versus the CAD.

The uncertainty around the oil output freeze agreement between Organization of the Petroleum Exporting Countries (OPEC) and Russia after Iran has said it would not join until after almost doubling production has brought oversupply concerns to the forefront. Saudi Arabia announced earlier in the week that there was no gains from production levels in January. The output freeze was able to stabilize the price of oil to the point where U.S. inventories rising did not make a dent in the price of oil a week ago rather the focus was on gasoline demand growing as seen by a decrease in stockpiles.

West Texas crude dropped 2.29 percent in the last 24 hours and continues a downward trend since the Iran comments and the possible production freeze summit date has been pushed back to April. The global slowdown has reduced demand for energy at the same time that producers have continue to pump at record levels. Iran had to reduce its oil production after a 5 year sanction period and is eager to at least match pre-sanction levels before agreeing to a freeze.

USD Gains Ahead of FOMC Meeting

The biggest movers of the day were commodity currencies due to the volatility in the energy market. The USD advanced against the CAD (0.73 percent) the AUD (0.77 percent) and the NZD (1.34 percent). Brexit fears have taken a toll on the British pound. The Swiss franc is seen as a safe haven and looks attractive to investors looking to hedge against the fallout of a Brexit. The GBP lost 1.19 percent versus the CHF and 1.24 percent versus the USD.

U.S. Economic Fundamentals have been mixed. Employment continues to be the strongest pillar but deep cracks are showing through on retail sales as consumers are saving more and spending less. The Fed had forecasted 4 rate hikes in 2016, but with current economic conditions those expectations could get adjusted during the release of the Fed’s economic projections.

There is anxiety in the markets as the U.S. central bank could point to June as a strong possible FOMC meeting to announce a follow up to the December rate hike. Canadian economic indicators on Wednesday will start the day with Manufacturing sales forecasted lower than last month at 0.4 percent. The strong loonie after the credit crisis in 2008, supported by strong oil prices, made manufacturing in Canada too expensive and most of the manufacturing base moved to cheaper destinations. Now that the currency is not as strong, it has proven a challenge to rebuild after the erosion even with a relative competitive advantage on wages. The price of oil and Canadian manufacturing sales will define how the loonie flies into the release of the FOMC and the press conference by Chair Yellen that could further boost the USD.

Central banks have faced a tough market that is not reacting as expected to official rhetoric and even in some cases bold monetary policy action. Canada is set to blaze a different path as it is putting monetary policy on hold in favour of fiscal policy. The Federal budget will be published in March 22 and the market will be waiting to see how bold the stimulus will be for a market that is proving harder to impress.

This article is for general information purposes only. It is not investment advice or a solution to buy or sell securities. Opinions are the authors; not necessarily that of OANDA Corporation or any of its affiliates, subsidiaries, officers or directors. Leveraged trading is high risk and not suitable for all. You could lose all of your deposited funds.

Alfonso Esparza specializes in macro forex strategies for North American and major currency pairs. Upon joining OANDA in 2007, Alfonso Esparza established the MarketPulseFX blog and he has since written extensively about central banks and global economic and political trends. Alfonso has also worked as a professional currency
trader focused on North America and emerging markets. He holds a finance degree from the Monterrey Institute of Technology and Higher Education (ITESM) and an MBA with a specialization on financial engineering and marketing from the University of Toronto.

MarketPulse is a forex, commodities, and global indices analysis, and forex news site providing timely and accurate information on major economic trends, technical analysis, and worldwide events that impact different asset classes and investors.

This article is for general information purposes only. It is not investment advice or a solution to buy or sell securities.

Opinions are the authors — not necessarily OANDA’s, its officers or directors. OANDA’s Terms of Use and Privacy Policy apply. Leveraged trading is high risk and not suitable for all. Losses can exceed investments.

OANDA (Canada) Corporation ULC accounts are available to anyone with a Canadian bank account. OANDA (Canada) Corporation ULC is regulated by the Investment Industry Regulatory Organization of Canada (IIROC), which includes IIROC's online advisor check database (IIROC AdvisorReport), and customer accounts are protected by the Canadian Investor Protection Fund within specified limits. A brochure describing the nature and limits of coverage is available upon request or at www.cipf.ca.

OANDA Europe Limited is a company registered in England number 7110087 limited by shares with its registered office at Tower 42, Floor 9a, 25 Old Broad St, London EC2N 1HQ and is authorised and regulated by the Financial Conduct Authority, No: 542574.

OANDA Asia Pacific Pte Ltd (Co. Reg. No 200704926K) holds a Capital Markets Services Licence issued by the Monetary Authority of Singapore and is also licenced by the International Enterprise Singapore.

OANDA Australia Pty Ltd is regulated by the Australian Securities and Investments Commission ASIC (ABN 26 152 088 349, AFSL No. 412981) and provides and is the issuer of the products and/or services on this website. It's important for you to consider the current Financial Service Guide (FSG), Product Disclosure Statement ('PDS'), Account Terms and any other relevant OANDA documents before making any financial investment decisions. These documents can be found here.